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Last Week in the City: Brexit Junck mail

byGarry White

in Features

18.01.2019

Hopes that a resolution could be found to Donald Trump’s trade war mounted, boosting global equity markets. Brexit confusion continued, with UK Prime Minister Theresa May’s Withdrawal Agreement enduring an historic defeat in parliament. This followed a joint letter from European Commission President Jean-Claude Juncker and EU Council President Donald Tusk that said EU President Donald Tusk and EC President Jean-Claude Juncker wrote a joint letter to Mrs May but it offered no concessions.

US investment banks had a mixed reporting season and the Detroit Motor Show kicked off at a time when most carmakers are having a difficult time. Bad news in the UK retail sector continued, with Paperchase the latest high-street name reportedly looking at a Company Voluntary Arrangement (CVA).

The FTSE 100 rose 0.3% over the week by mid-session on Friday. The FTSE 250 was up 0.6%.

Prime Minister Theresa May suffered a humiliating defeat in parliament. The EU Withdrawal Agreement was voted down in the biggest losing vote for a government ever. However, Mrs May won a vote of no confidence in her government. Parliament will debate and vote on Mrs May's Brexit “plan B” on 29 January. However, the clock is ticking until March 29 and time is getting tight. This has raised speculation of an extension of the Article 50 deadline. Indeed, former Prime Minister Gordon Brown called for the UK government to delay Britain's exit from the European Union by a year in a new speech on Thursday evening.

The French government has announced plans to hire 600 extra customs agents and other employees to handle cross-border trade in the event of a no-deal Brexit.

European aircraft maker Airbus said it took part in a conference call late on Tuesday between business leaders and British ministers after MPs rejected Prime Minister Theresa May's Brexit withdrawal deal. “I would not say assurances, but I would say ministers have expressed a certain degree of optimism that a no-deal Brexit would not happen," chief executive Tom Enders told Reuters.

JP Morgan chief executive Jamie Dimon warned against a “hard Brexit” by the UK from the European Union. "I think a hard Brexit will be a disaster for Great Britain," Mr Dimon said at an event in New York. “We don't think it's going to happen, because it's bad for Europe too.”

The boss of Procter & Gamble, maker of Fairy liquid and Gillette razors, said its products could cost more if the UK leaves the EU with no deal.

A much more upbeat analysis came from Capital Economics. “We think the UK economy and sterling will hold up better than is widely expected in each of several different Brexit outcomes,” the research consultancy said. “Indeed, in all but our no deal Brexit scenario, the release of some pent up demand means that, in 2020, the UK may be the fastest growing G7 economy. As such, the Bank of England may well be raising interest rates in the second half of 2020, when the US Fed is cutting them."

Economics

Hopes that the US Federal Reserve will pause it tightening cycle mounted after vice chairman Richard Clarida has told Fox News that the central bank will "be patient" when dealing with policy, echoing statement from chairman Jay Power. Mr Clarida said this was down to the fact that in the US there is a good economic momentum but a slowdown overseas. Esther George, the President of Kansas City Fed and a voting member of the rate-setting Federal Open Market Committee, made similar point in a speech. Mrs George is regarded as one of the committee’s most hawkish members.

UK CPI inflation fell to 2.1% in December, according to the Office for National Statistics. That's the lowest level in almost two years.

Household debt in the UK more than doubled as a share of GDP over the past 40 years, prompting an analysis by the Bank of England. It concluded that the issue was not of great concern. “Over the past 30 years, falling real interest rates have allowed UK households to take on more debt, and that larger stock of debt looks as though it should be sustainable, provided real rates do not rise by too much,” the Bank said.

Germany’s economy grew at its slowest rate in five years during 2018, as global growth slows. Europe’s-largest economy expanded by just 1.5% last year, down from 2.2% in both 2016 and 2017. However, the good news was that the country appears to have escaped a technical recession. After GDP slipped by 0.2% in the third quarter, the data implied a positive fourth-quarter outcome.

Signs of the slowdown in China’s economy are becoming clearer. The country revised its final 2017 GDP reading down from 6.9% to 6.8% on Friday. The move came ahead of China’s GDP reading from the fourth quarter of 2018, which is released on Monday. The current consensus view is for expansion of 6.4%, down from 6.5% in the third quarter. However, UBS said it expected a figure of 6.2%. Data also showed that China’s December exports and imports fell unexpectedly. China’s trade surplus with the US grew 17% from a year ago, despite the impact of Trump’s tariffs on Chinese goods. This is the highest on record dating back to 2006. Still, the overall Chinese trade surplus last year was the lowest since 2013. As a result the country unveiled some stimulus measures including extra funding for small and medium-sized businesses and lower value-added tax rates for certain industries and tax rebated for others.

Geopolitics

Donald Trump cancelled a trip by a high-level US delegation to next week's World Economic Forum at the Swiss mountain resort of Davos, citing the ongoing government shutdown in America. Theresa May also said that she would not attend as she continued to deal with Brexit talks.

The trade war is impacting Chinese foreign direct investment into the US. Last year, this fell to just $4.8bn, representing a massive decline from the $29bn seen in 2017 and $46bn in 2016, according to independent researcher the Rhodium Group. However hopes mounted that things were progressing well after a Wall Street Journal report said US officials were debating dialling back tariffs on Chinese imports.

Solving the trade war is in the interest of President Xi and President Trump, argues Garry White. He thinks a deal should be forthcoming soon. Click here for more.

Technology

Germany is considering ways to block Chinese group Huawei from its next-generation 5G mobile phone network, reports suggested. Many countries have pushed against the involvement of the Chinese technology firm in their 5G networks over security concerns. The University of Oxford also suspended new donations and sponsorships from Huawei. Oxford University is not the only UK educational institution to have accepted funding from Huawei. It has worked with more than 20 universities over the last five years. They include the University of Surrey which has accepted £5m from the Chinese telecoms equipment maker while Huawei has invested £1m into a lab at Cambridge University. MP Tom Tugendhat said: "I'm sure that each of these universities will have to look very carefully at the investments that [China] is making.” He also criticised that state-backed Chinese companies that steal intellectual property. "Huawei sees no rational reason why it should be excluded from building 5G infrastructure in Germany, or indeed in any country in the world,” the company said. To see how this trend of technological distrust between East and West could impact the future of the internet click here.

Shares in FTSE 100-listed accounting group Sage jumped after management said its organic service revenue grew by 7.6% in the first quarter to £465m.

Shares in UK cyber security company Sophos slumped, after management warned of slightly lower annual billings next year, as hardware and sales to new customers fell.

A mega-deal in the fast-developing US financial technology (fintech) space was announced. Fiserv agreed to an all-share deal to buy rival payments and financial technology provider First Data in a deal that valued the combined group at $22bn.

Netflix added almost nine million new paying subscribers during the final three months of 2018, beating its own expectations of 7.6 million. The service now has 139 million subscribers globally. It expects to add another 8.9 million in the quarter that ends in March, the vast majority of which are expected to come from strong growth in its international markets. However, its shares fell following the figures as the revenues figure missed Wall Street expectations. It operating margin also fell because of “so many titles launching in the quarter”. Note Bank of America Merrill Lynch also said this week that traditional TV viewing is declining even faster than it thought. As a result it doubled downgraded its rating on ITV shares to “underperform" from "buy".

Apple chief executive Tim Cook called for greater online privacy for consumers and asked Congress to pass legislation to help make it happen. In a Time magazine op-ed, Mr Cook said government should regulate how data brokers can store and sell your data. Apple will cut hiring after selling fewer iPhones than expected, according to a report from Bloomberg. It was also announced that Sofia Coppola will reunite with Lost in Translation star Bill Murray to make Apple's first original feature film.

Facebook said it had removed 500 pages and accounts allegedly involved in peddling fake news in Central Europe, Ukraine and other Eastern European nations.

Music steaming service Tidal was put under investigation in Norway over claims the numbers of listeners to 2016 albums by Beyonce and Kanye West, amongst others, were inflated. The company behind Tidal was bought by Beyonce's husband, Jay-Z, in 2015.

Shares in Snap – owner of social media app Snapchat – slumped following the surprise resignation of Tim Stone, chief financial officer, after just eight months. Mr Stone follows several other senior executives who have left the co0mpany in the last 12 months.

Shares in US-listed watchmaker Fossil jumped after the company announced it was selling its smartwatch technology to Alphabet-owned Google for $40m.

Analysts at Citigroup turned bullish on technology revealing that, for the first time in six years, it had a buy on all four FANG stocks – Facebook, Amazon, Netflix and Google (Alphabet).

Energy

Brent crude futures were up 3.1% over the week by mid-session on Friday to trade at almost $62 a barrel, as the current positive run continued.

The UK is “committed” to the nuclear power industry, according to a spokesman for Prime Minister Theresa May, despite Japan's Hitachi suspending construction of Wylfa Newydd facility in Anglesey, north Wales. Hitachi has said it will suspend work on the multi-billion-pound UK nuclear project because of rising costs. The move throws more confusion into UK energy policy. Hinkley, Moorside, Wylfa, Oldbury, Bradwell and Sizewell were identified as the sites for the most significant national wave of new nuclear power construction anywhere in the world. Of those six – just one is under construction, three have been abandoned and two face a struggled to be approved.

US oil production growth combined with a slowing global economy will put oil prices under downward pressure in 2019, challenging Opec’s resolve to support the market with output cuts, the International Energy Agency said on Friday.

Retail

UK retailers experienced their customary post-Black Friday slump in December, Office for National Statistics figures showed. The volume of goods sold in stores and online fell a larger-than-forecast 0.9% from November, when they surged 1.3%. Sales excluding auto fuel dropped 1.3%, the most since May 2017.

A record £25bn is due to be spent by UK citizens via their smartphones in 2019, a 66% increase year-on-year, according to a new study from uSwitch.com. This highlights the challenges facing bricks-and-mortar retailers and underscores the importance of a good ecommerce strategy.

Primark sales defied the retail gloom over Christmas. Its owner, Associated British Foods, said the fast-fashion retailer gained market share, increased sales and cut down on discounting. Sales at the cut-price fashion chain’s established UK stores rose 3% over the Christmas period, according to analysts’ estimates, and slipped less than 2% in the four months to 5 January.

The cross-pollination of billionaire Sports Direct founder Mike Ashley's other retail brands is starting to occur, giving a hint as to his long-term strategy. Lingerie by Agent Provocateur, the company Mr Ashley bought out of administration in 2017, will soon be sold in House of Fraser, which Mr Ashley also bought out of administration in 2018. Mr Ashley has also built up a near-30% stake in Debenhams. Credit ratings agency Moody’s also cut its outlook to “negative” from “stable” following a boardroom coup that saw Mr Ashley co-ordinate a campaign to vote its chairman and chief executive off the board and a weak Christmas trading update.

Cards and stationery retailer Paperchase is considering closing stores via an insolvency procedure. The company, which was bought by private-equity firm Primary Capital in 2010, blamed a decline in shopper numbers and rising costs, particularly rates and rent.

New Look’s Belgium division has filed for insolvency as the fashion retailer reviewed its international operations after announcing a debt-for-equity swap earlier in the week. The deal involved New Look handing over majority ownership of the group to creditors in a bid to slash its debt.

Administrators for HMV are reportedly considering up to eight proposals from interested parties, which were said to include Elliott Advisors, which bought the Waterstones bookstore chain last year. A North American music retailer is also said to have expressed an interest in some HMV sites.

In the US, troubled department store chain Sears was rescued. Billionaire Eddie Lampert, a hedge fund financier who is chairman of Sears and its former chief executive, won a bankruptcy court auction to purchase the company for $5.2bn.

Consumer

Gambling stocks wobbled after a US legal ruling that reversed an earlier decision. The US Justice Department said federal law bars all internet gambling, reversing its position from 2011 that only sports betting is prohibited. The reversal was prompted by the department’s criminal division, which prosecutes illegal gambling. Shares in Paddy Power Betfair, 888 Holdings, William Hill and GVC were all hit. However, GVC, which owns the bookmaker Ladbrokes, said it now expects full-year profits will be ahead of market expectations following a strong final quarter of 2018.

Whitbread, the owner of the Premier Inn hotel chain, reported rising sales but said it remained "cautious on UK environment next year given uncertainty and higher inflation". As a result, it downgraded its guidance for next year. The group completed the sale of its Costa Coffee business for £3.9bn to Coca-Cola on 3 January.

Cineworld said a record 308 million people visited its cinemas in 2018. This generated revenue growth of 7.2% and the company said it was trading in line with its expectations.

Auto sector

The Detroit Motor show was held this week and companies such as Volkswagen unveiled investments in electric vehicles. However, the sector facing a number of threats, especially as car ownership is expected to fall in the next 20 years. For an insight into the current woes facing the sector click here.

Former Nissan boss Carlos Ghosn received almost €8m in "improper payments" from a Netherlands-based joint venture, the Japanese car giant alleged, threatening to sue to recover the funds. The company said the contract was signed without consultation with current Nissan chief executive Hiroto Saikawa or Mitsubishi Motors chief executive Osamu Masuko.

A fall in Chinese demand and tougher emissions testing continued to put the brakes on European car sales in December, which dropped for the fourth month in a row. New car registrations fell 8.4% last month, according to the European Automobile Manufacturers Association (EAMA), following an 8% drop in November. Exports of German cars from the US to China fell by 37% in 2018, according to latest data from German auto industry association VDA.

FordMotor Co and Volkswagen agreed to co-operate on the development of vans and pickup trucks in a bid to reduce costs. The two companies said they would also look into co-operating on developing electric and self-driving cars.

Ford Motor Co also forecast a weaker-than-expected fourth quarter profit and provided a cloudier 2019 outlook due to tariff costs and uncertainty over Britain’s exit from the European Union. It did not provide detailed financial guidance.

Elon Musk’s electric vehicle maker Tesla said it will cut full-time employee headcount by about 7%. “Last year was the most challenging in Tesla’s history,” the company said. The news came a week after Mr Musk has broken ground at a new factory in Shanghai, the electric carmaker's first manufacturing plant outside the US. This appears like a transfer of jobs from the US to China, so may garner interest from President Trump.

Chinese car sales fell last year for the first time since 1990. This is a major issue for carmakers Volkswagen and GM, as they sell more vehicles in China than in any other country. However, electric vehicle sales jumped 62%.

John Redwood, Charles Stanley’s Chief Global Economist, argues that policymakers worldwide need to look at the global auto sector to get guidance for good policy here.

Travel

Ryanair cut its profit guidance, blaming lower-than-expected air fares. Chief executive Michael O'Leary said fares could fall even more that the expected 7% decline this winter. He said the low fares were already causing problems for rivals, including Flybe which was rescued last week. Full-year profits are now expected to be in a range of €1.0bn to €1.1bn, compared with its previous forecast of €1.1bn to €1.2bn. JP Morgan also downgraded its rating on easyJet shares to “neutral”.

Budget airline Norwegian Air announced it will cut some routes in the US, Europe and the Middle East, as well as transcontinental flights, in order to enable it to cut costs and improve its financial performance

Financials

Profits at US banking giant Morgan Stanley more than doubled in the fourth quarter year-on-year, but the numbers were below Wall Street expectations. Morgan Stanley had the worst bond trading performance among the big five Wall Street investment banks.

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